Demystify the Special Memorandum Account (SMA). Understand the exact mathematics of how SMA is generated on market appreciation, why SMA never decreases when market values plummet, how to calculate purchasing power (2x SMA), and how cash withdrawals affect the debit balance.
| Strategy / Concept | Definition & Structure | Golden Rule | FINRA Exam Trap |
|---|---|---|---|
| SMA Creation via Market Rise | Excess equity generated when LMV increases above the Reg T 50% requirement | For every $2 rise in LMV, Equity increases by $2, Reg T requirement increases by $1, creating $1 in NEW SMA (50% of the gain). | Assuming that 100% of the market rise becomes SMA. Only 50% of the appreciation becomes SMA! |
| SMA Behavior on Market Decline | What happens to the SMA balance when market value drops back down | SMA NEVER DROPS DUE TO A MARKET DECLINE. It represents a preserved line of credit that remains intact until utilized. | Choosing an answer that subtracts from SMA after a stock drops. Only customer cash withdrawals or purchases reduce SMA! |
| Purchasing Power using SMA | The amount of new marginable securities a customer can purchase using accumulated SMA | Purchasing Power = SMA ÷ Reg T% (with Reg T at 50%, Purchasing Power is always 2 × SMA). | Thinking purchasing power is equal to SMA. Purchasing power is DOUBLE the SMA balance! |
| Cash Withdrawal using SMA | Withdrawing cash from the account based on available SMA | Withdrawing $1 of cash reduces SMA by $1 and INCREASES Debit Balance (loan) by $1. | Forgetting that cash withdrawal increases the loan from the broker-dealer, reducing customer equity dollar-for-dollar. |
New SMA = (New LMV - Original LMV) × 50%Whenever long market value climbs to a new high water mark, half of the gain is credited to the SMA ledger.
Buying Power = SMA × 2Because Reg T requires 50% equity, every dollar of SMA credit supports two dollars of marginable purchases without new cash.
New DR = Old DR + Cash Withdrawn (SMA decreases dollar-for-dollar)Cash is paid out of the firm's loan facility, so the debit balance expands by the full withdrawal amount.
A customer has a long margin account with Long Market Value (LMV) of $40,000 and a Debit Balance (DR) of $32,000. Customer equity is currently $8,000. Under FINRA rules, what is the minimum maintenance requirement, and has a maintenance call occurred?
An investor has a long margin account with a Debit Balance of $18,000. At what Long Market Value (LMV) will the account receive a minimum maintenance call?
An investor establishes a short position and has a total Credit Balance of $26,000. At what Short Market Value (SMV) will the account receive a minimum maintenance call?
A customer opens a margin account and buys 1,000 shares of stock at $40 ($40,000 total), depositing $20,000 cash under Reg T. The market value rises to $50,000. How much SMA is generated by this price increase?
A margin account has an LMV of $60,000, DR of $30,000, and an SMA balance of $8,000. The market value subsequently drops to $45,000. Assuming no customer withdrawals or transactions, what is the NEW SMA balance?
An investor's margin account shows an SMA balance of $7,000. If Regulation T is 50%, what is the customer's total BUYING POWER for marginable stock?
An investor has an account with LMV $50,000, DR $20,000, EQ $30,000, and SMA $5,000. If the customer withdraws $3,000 in cash from the account, what are the new DR, EQ, and SMA balances?